Participatory Notes (P-Notes)

P-Notes or Participatory Notes are Overseas Derivative Instruments that have Indian stocks as their underlying assets. They allow foreign investors to buy stocks listed on Indian exchanges without being registered. The instrument gained popularity as FIIs, to avoid the formalities of registering and to remain anonymous, started betting on stocks through this route.

Participatory notes are the financial instruments through which individual foreign investors or hedge funds who do not want to disclose their identity can invest in Indian markets, otherwise registration with SEBI is a must to get an exposure into Indian equities.

  Registered foreign institutional investors (FIIs), foreign banks and brokerages based in India issue P-notes to foreign investors and invest in Indian stocks on their behalf. Any dividends or capital gains collected from the underlying securities go back to the investors.

  While a common investor has to fill up several KYC (know your customer) forms, provide PAN number and proof of address, etc, a P-Note investor can invest anonymously. This makes it a ‘legal’ way to route unaccounted wealth in Indian equities, thus feeding the black money monster.

  Other than politicians, bureaucrats or business-persons, even terror financiers are feared to misuse the P-Note route to fulfill illegal objectives.

  A flurry of suggestions SIT made to tackle the black buck menace, including cancelling the participation in the Indian markets by way of P-notes altogether.

  Taking cues from the suggestions, SEBI has now made it mandatory for the P-Notes holders to adhere to Indian Know your customer (KYC) or anti-money laundering (AML) norms.

  SEBI has also put curbs on the transfer-ability of P-notes between two foreign investors. Further, it has also increased the frequency of reporting by P-notes issuers.

  Brokerage Angel Broking said the new set of rules is likely to tighten the round tripping of money by Indian investors, but might see some slowdown in the incremental funds flow in to Indian markets.

  The brokerage, however, believed foreign investors with a long term horizon in India should have no issues adhering to the new set of norms.


The primary reason why P-Notes are worrying is because of the anonymous nature of the instrument as these investors could be beyond the reach of Indian regulators. Further, there is a view that it is being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.


SEBI has taken a number of steps to tighten rules on P-Notes.

  From January 2011, FIIs have had to follow KYC norms and submit details of transactions.

  In 2014, new rules on foreign portfolio investors (FPIs) made it mandatory for those issuing P-Notes to submit a monthly report disclosing their portfolios. This led to a decline in the number of entities issuing P-Notes.

  More recently, SEBI mandated that in addition to KYC, the anti-money laundering rules (AML) will also be applicable to P-Note holders. Earlier, a P-Note holder had to adhere to KYC or AML norms of just their home jurisdiction.

  SEBI also issued norms on transferability of P-Notes between two foreign investors and increased the frequency of reporting by P-Note issuers.

  In a recent development, on July 8, 2017, SEBI issued circular banning FPIs from issuing Participatory Notes for investing in equity derivatives. At the same time, FPIs can issue PNs to overseas investors if the equity derivatives investments are used for hedging the equity shares held by them. This means that a foreign investor can make investment in equity derivatives only if he purchases an equal value of shares in the cash segment. Effectively, this step will help to avoid speculative investment by foreign investors using PN in derivatives. SEBI also instructed ODI-issuing FPIs to liquidate such ODI instruments prior to the timeline of 2020.

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